Thoughts on economics and liberty

Ronald Coase on George Stigler’s Coase Theorem

In this I have extracted from the 1959 FCC paper which started off the “Coase Theorem”, and made a video compiling sections from different videos on which Coase himself speaks on the subject. Time permitting, I’ll add Coase’s further talks/ writings on this topic:

Video

TEXT FROM THE FCC PAPER:

Let us start our analysis of this situation by considering the case of Sturges v. Bridgman,51 which illustrates the basic issues. A confectioner had used certain premises for his business for a great many years. When a doctor came and occupied a neighboring property, the working of the confectioner’s ma­chinery caused the doctor no harm until, some eight years later, he built a consulting room at the end of his garden, right against the confectioner’s premises. Then it was found that noise and vibrations caused by the machinery disturbed the doctor in his work. The doctor then brought an action and succeeded in securing an injunction preventing the confectioner from using his machinery. What the courts had, in fact, to decide was whether the doctor had the right to impose additional costs on the confectioner through compelling him to install new machinery, or move to a new location, or whether the confectioner had the right to impose additional costs on the doc­tor through compelling him to do his consulting somewhere else on his premises or at another location.52 What this example shows is that there is no analytical difference between the right to use a resource without direct harm to others and the right to conduct operations in such a way as to produce direct harm to others. In each case something is denied to others: in one case, use of a resource; in the other, use of a mode of operation.53 This example also brings out the reciprocal nature of the relationship which tends to be ignored by economists who, following Pigou, approach the problem in terms of a dif­ference between private and social products but fail to make clear that the suppression of the harm which A inflicts on B inevitably inflicts harm on A. The problem is to avoid the more serious harm. This aspect is clearly brought out in Sturges v. Bridgman, and the case would not have been different in essentials if the doctor’s complaint had been about smoke pollution rather than noise and vibrations.

Once the legal rights of the parties are established, negotiation is possible to modify the arrangements envisaged in the legal ruling, if the likelihood of being able to do so makes it worthwhile to incur the costs involved in negotia¬tion. The doctor would be willing to waive his right if the confectioner would pay him a sum of money greater than the additional costs he would have incurred in carrying out his consulting at another location (which we will assume to be $200). The confectioner would be willing to pay up to an amount slightly less than the additional costs imposed on him by the decision of the court in order to induce the doctor to waive his rights (which we will assume to be $100). With the figures given, the doctor would not accept less than $200, and the confectioner would not pay more than $100, and the doctor would not waive his right. But consider the situation if the confectioner had won the case (as well he might). In these circumstances the confectioner would be willing to waive his right if he could obtain more than $100, and the doctor would be willing to pay slightly less than $200 to induce the confectioner to do so. Thus it should be possible to strike a bargain which would result in the confectioner’s waiving his right. This hypothetical example shows that the delimitation of rights is an essential prelude to market transactions; but the ultimate result (which maximizes the value of production) is inde¬pendent of the legal decision.”

What this analysis demonstrates, so far as the radio industry is concerned, is that there is no analytical difference between the problem of interference be¬tween operators on a single frequency and that of interference between opera¬tors on adjacent frequencies. The latter problem, like the former, can be solved by delimiting the rights of operators to transmit signals which interfere, or might potentially interfere, with those of others. Once this is done, it can be left to market transactions to bring an optimum utilization of rights. It is sometimes implied that the aim of regulation in the radio industry should be to minimize interference. But this would be wrong. The aim should be to maximize output. All property rights interfere with the ability of people to use resources. What has to be insured is that the gain from interference more than offsets the harm it produces. There is no reason to suppose that the optimum situation is one in which there is no interference. In general, as the distance from a radio station increases, it becomes more and more difficult to receive its signals. At some point, people will decide that it is not worthwhile to incur costs involved in receiving the station’s signals. A local station operating on the same frequency might be easily received by these same people. But if this station operated simultaneously with the first one, people living in some region intermediate between the stations may be unable to receive signals from either station. These people would be better off if either station stopped operating and there was no interference; but then those living in the neighbor¬hood of one of these other stations would suffer. It is not clear that the solution in which there is no interference is necessarily preferable.

Sanjeev Sabhlok

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